speculative attacks Research Papers - Academia.edu (original) (raw)

2025

This paper studies defense policies in a global-game model of speculative currency attacks. Although the signaling role of policy interventions sustains multiple equilibria, a number of novel predictions emerge which are robust across all equilibria. (i) The central bank intervenes by raising domestic interest rates, or otherwise raising the cost of speculation, only when the value it assigns to defending the peg—its “type”—is intermediate. (ii) Devaluation occurs only for low types. (iii) The set of types who intervene shrinks with the precision of market information. (iv) A unique equilibrium policy survives in the limit as the noise in market information vanishes, whereas the devaluation outcome remains indeterminate. (v) The payoff of the central bank is monotonic in its type. (vi) The option to intervene can be harmful only for sufficiently strong types; and when this happens, weak types are necessarily better off. While these predictions seem reasonable, none of them would hav...

2024

Abstract: There is a growing literature using the global game approach to study coordination games. Several papers show a unique equilibrium as long as signals are not too noisy. In this paper, we provide an example in the context of... more

2024

This paper challenges Morris and Shin’s (1998) argument that the outcome of a speculative attack is uniquely determined by macroeconomic fundamentals. We generalize Morris and Shin’s model, and the experiment of Heinemann, Nagel, and Ockenfels (2004), by making decisions sequential and allowing some previous actions to be observed. We show sufficient conditions that guarantee the existence of a range of fundamentals where multiple outcomes occur. The main requirement is simply that most players must observe a sufficiently large number of previous choices. In our experimental sessions, eight to twelve players observe signals about the aggregate state and may also observe a random subset of previous actions. Our subjects display herding behavior consistent with the unique logit equilibrium of a boundedly rational version of our game. These strategies imply a unique mapping between fundamentals and the fraction of players attacking if previous actions are unobserved. But when most prev...

2024, International Review of Financial Analysis

This study further investigates the impact of IMF actions on stock markets during the Asian crisis. Extending two earlier studies by Kho and Stulz (2000) and Evrensel and Kutan (2007), we investigate the long-term shareholder wealth impact of IMF actions and programs on both financial and real sector returns in the stock markets of Thailand, Indonesia, and Korea. We perform a series of tests employed in Cornett and Tehranian (1989, 1990) that incorporate heteroscedasticity across sectors and contemporaneous dependence of the disturbances. The findings indicate that IMF actions regarding liquidity disbursement or liquidity concerns in markets are the most important events affecting abnormal returns and hence investor wealth in both real and financial sectors. However, the response of the financial sector to IMF actions is much stronger than that of the real sector. In addition, the results suggest moral hazard effects during the Asian crisis in all the three countries.

2024, SSRN Electronic Journal

This paper examines the impact of International Monetary Fund (IMF) announcements programs on different sectors of the economy. Previous studies approach this issue from the perspective of financial sector and/or composite index returns only; there is limited evidence on the impact of IMF actions on stock prices in non-financial sectors. This paper provides comprehensive evidence on the impact of IMFrelated announcements in different sectors of the economy during the Asian crisis. The results indicate that IMF actions affect sector returns asymmetrically, suggesting that investors have different expectations regarding the restructuring costs associated with IMF-imposed reforms in certain sectors. More important, the results that indicate the net wealth effects of IMF actions in private financial markets can be best understood by providing evidence from both financial and non-financial sectors.

2023, Revista de historia económica

The objective of this paper is twofold. First, it identifies and categorizes the currency crises suffered by Argentina from 1825 to 2002. Second, it looks for regularities in the behaviour of key macroeconomic variables in the neighbourhood of crises by means of graphic analysis, non-parametric and econometric techniques. We found that expansions in public expenditures as well as increases in the debt to GDP ratio and falls in the rate of growth of bank deposits contribute to spur the probability of crisis. Unfavourable external conditions, jointly with domestic imbalances, help to explain very deep crises or crashes.

2023, The Evidence and Impact of Financial Globalization

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe... more

2023, Revista Brasileira de Economia

In this paper we propose a dynamic stochastic general equilibrium model to evaluate …nancial adjustments that some emerging market economies went through to overcome external crises during the latest decades, such as default and local currency devaluation. We assume that real devaluation can be used to avoid external debt default, to improve trade balance and to reduce the real public debt level denominated in local currency. Such e¤ects increase the government ability to deal with external crisis, but also have costs in terms of welfare, related to expected in ‡ation, reductions in private investments and higher interest to be paid over the public debt. We conclude that openness improves expected welfare as it allows for a better devaluation-response technology against crises. We also present results for 32 middle-income countries, verifying that the proposed model can indicate, in a stylized way, the preferences for default-devaluation options and the magnitude of the currency depreciation required to overcome 48 external crises occurred as from 1971. Finally, as we construct our model based on the Cole-Kehoe self-ful…lling debt crisis model ([7]), adding local debt and trade, it is important to say that their policy alternatives to leave the crisis zone remains in our extended model, namely, to reduce the external debt level and to lengthen its maturity.

2023, Economia Aplicada

Este artigo analisa as crises cambiais dos principais países da América do Sul, no período de 1992 a 1998, com base no modelo de Velasco (1996). Este é um modelo que sintetiza dois enfoques: ataques especulativos resultantes de desequilíbrios nos fundamentos macroeconômicos e resultantes de profecias auto-realizáveis, mesmo quando as economias apresentam bons fundamentos. Nove países latino-americanos são classificados por meio da construção de um índice derivado de uma função perda. Desse modo é possível agrupar os países pelo grau de vulnerabilidade às crises, estabelecendo-se zonas de credibilidade. Os resultados indicam que a economia brasileira, por apresentar problemas nos fundamentos macroeconômicos, foi classificada em uma zona de credibilidade nula. A Argentina moveu-se de uma zona de alta credibilidade para uma faixa intermediária. Isto indica que a Argentina tornou-se suscetível às crises autorealizáveis. As demais economias situaram-se numa região de alta credibilidade.

2023, SSRN Electronic Journal

The literature on speculative attacks has been given new Galindo and Maloney test two popular asset-based impetus by the collapse of the European currency models of speculative attacks-Krugman and arrangements beginning in 1992, by the Mexican peso Rotemberg (1992) and Calvo and Mendoza (1995)crisis and after-effects in 1994, and most recently by especialLy their emphasis on the second moments of speculative attacks across Asia. monetary aggregates. One strand of this literature stresses the importance of Analyzing monthly panels of appropriate countries in imbalances in stocks of monetary and financial three regions, they find evidence for the importance of aggregates rather than traditional "flow" factors, arguing money/reserve ratios predicted by both models, and their that massive, volatile capital flows have become a variance as predicted by Calvo and Mendoza. dominant feature of the global landscape, and that But the variance of velocity does not appear to be exchange-rate levels and current accounts have not important, casting some doubt on the Krugmanproved convincing as proximate causes of crises. Rotemberg target zone framework and the interpretation of the Calvo-Mendoza results. This papera product of the Poverty and Economic Management Unit of the Latin America and the Caribbean Regionis part of a larger effort in the region to understand the determinants of macroeconomic instability. Copies of the paper are available free from the World Bank,

2023, Revista Brasileira de Economia

2022, Revista de Historia Económica / Journal of Iberian and Latin American Economic History

ABSTRACTThe objective of this paper is twofold. First, it identifies and categorizes the currency crises suffered by Argentina from 1825 to 2002. Second, it looks for regularities in the behaviour of key macroeconomic variables in the neighbourhood of crises by means of graphic analysis, non-parametric and econometric techniques. We found that expansions in public expenditures as well as increases in the debt to GDP ratio and falls in the rate of growth of bank deposits contribute to spur the probability of crisis. Unfavourable external conditions, jointly with domestic imbalances, help to explain very deep crises or crashes.

2022, Revista Brasileira de Economia

2022, Governing Global Finance

Emerging Market Financial Crises and the Second Reform of the International Financial Architecture T he second reform of the IFA followed an unprecedented expansion in financial globalization from the mid-1970s until the mid-1990s that encompassed both advanced and emerging market economies. This period of financial globalization was encouraged by the onset of floating exchange rates among the major advanced countries, the removal of capital controls in these countries, and the liberalization of their domestic financial markets. The growth in international financial flows involved at first large banks in the major financial center countries of Europe, Japan, and North America during the 1970s and 1980s and then spread to private portfolio capital (bonds and equity) and foreign direct investment in the 1990s (see figure 2.3). These two periods of sharp upswings in the flow of foreign capital, followed by major reversals, were later repeated in the run-up and aftermath of the current financial crisis. The volatility of these flows has been a continuing problem for the stability of the international financial system. The growing exposure of developing countries to financial globalization by means of recourse to international banking credits led ultimately to the sovereign debt crises of the early 1980s, which threatened the solvency of the large financial center banking institutions. This crisis in turn led to the first international effort at harmonizing international financial regulations through the so-called Basel Accord of 1988 on capital adequacy standards, which was initially intended for banks in the advanced countries. The second wave of financial globalization involving bank and non-bank flows of finance during the 1990s led

2022, The Evidence and Impact of Financial Globalization

2022, Journal of Environmental Economics and Management

Many resources extracted under the rule of capture are not utilized immediately but are stored instead for later use: oil is stockpiled; fish are frozen; groundwater is bottled; rivers are dammed; land, deforested as the way to establish title, remains uncultivated. We examine the positive and normative effects of such storage. Privatization of common property through storage may eliminate inefficiencies altogether but the accelerated extraction it induces may also exacerbate them-even if rapid extraction does not reduce ultimate recovery. Once storage commences, extraction accelerates until the open access reserves are drained. In limiting cases, these speculative acquisitions are instantaneous, the naturally occurring analogue of policy-induced "speculative attacks" studied in the international finance literature. When some reserves are privately owned while others are open access, the order of extraction no longer follows the progression from lowest to highest per-unit cost first noted by O.C. Herfindahl [in "Extractive Resources and Taxation" (M. Gaffney, Ed.), Univ. of Wisconsin Press, Madism (1997)]. Instead, the common property may be extracted in its entirety before any private reserves are extracted even if it has the higher per-unit extraction cost.

2022

What is the role of “large players”, e.g., hedge funds, in speculative attacks? Recent work suggests that large players move early to induce smaller agents to attack. However, many observers argue that large players move late so as to benefit from interest rate differentials. We propose a model where large players can do both. Using data on currency trading by foreign (large) and local (small) players, we find that foreign players moved last in three attacks on the Norwegian krone during the 1990s. During the attack on the Swedish krona after the Russian moratorium in 1998, foreign players moved early. Gains by delaying attack were small, however, since interest rates did not increase.

2022, International Business Research

Over the last decade, the whopping growth of the Chinese economy, due to the liberalization of its market, with regard to the vulnerable Eurozone's economic activity, has led to trade disputes between the two economies. In order to best capture and describe these implications, we attempt to approach their moves and payoffs through a combination of strategic and analytical tools such as zero-sum games and multiple regression models. Data and metadata for both economies were obtained from official sources, mainly the Eurostat and the National Bureau of Statistics of China and used as input in the regression model. Subsequently, the model output was used as input in the zero-sum game. The results of this process pointed out the best strategies that the players should follow in order to avoid great losses.

2022, Games and Economic Behavior

We experimentally examine equilibrium selection concepts in static and dynamic binary choice games of complete information with strategic complementarities known as "entry" games. Examples include speculative attacks, bank runs and refinancing decisions by multiple lenders. We explore behavior when the value of a state variable is known to all players in advance of making their action choices. Such games give rise to multiple equilibria and coordination problems. Our specific aim is to assess the predictive power of two different equilibrium selection principles. In static entry games, we test the theory of global games as an equilibrium selection device. This theory posits that players play games of complete information as if they were playing a related global game of incomplete information. In dynamic entry games, individuals decide not only whether to enter but also when to enter. Once entry occurs it is irreversible. The number of people who have already entered is part of the state description, and individuals can condition their decisions on that information. If the state variable does not indicate that entry is dominated, the efficient subgame perfect equilibrium prediction calls for all players to immediately choose to enter, thereby resolving the coordination problem. This subgame perfect entry threshold in the dynamic game will generically differ from the global game threshold in static versions of the same entry game. Our experimental findings suggest that entry thresholds in both static and dynamic versions of the same entry game are surprisingly similar. The mean entry threshold in the static game lies below the global game equilibrium threshold while the mean entry threshold in the dynamic game lies above the efficient subgame perfect equilibrium threshold. An important implication of this finding is that if one were to observe only the value of the state variable and the number of people who enter by the end of the game one could not determine whether the static or the dynamic game had been played.

2022

2021, Research Series Supervision

This paper investigates whether the fall in the euro-dollar exchange rate in the course of 2000 can be partly attributed to asymmetric reactions by investors to economic and political news. We have studied the daily euro-dollar exchange rate changes recorded from 1 April 2000 to the first coordinated exchange rate intervention on 22 September 2000, regressing these changes on economic and political news items about the US and the euro area. The paper suggests that investors' response to news about the US differs from that to news about the euro area. Specifically, the exchange rate did not respond to economic news about the euro area, whereas it did to US economic news. There are indications that the opposite holds true in respect of political news. Moreover, the paper shows a difference in the magnitude in the reaction to 'good' and 'bad' news items, which may suggest some additional news filtering by investors (cognitive dissonance). These asymmetric reaction pattern may explain at least partly why, contrary to what exchange rate theory would predict, the recovery of the economy in the euro area in the course of 2000 was not followed by an appreciation of the euro visà-vis the dollar. Importantly, given the relevance of political euro area news to investors, politicians and central bankers face the challenge to convince market participants of the viability of EMU.

2021

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2019, LAP LAMBERT Academic Publishing

The East Asian financial crisis in summer 1997 highly threatened the stability of the whole international monetary system. The International Monetary Fund (IMF) as an international institution being in charge of stability of international financial and monetary system could not restore stability in Thailand and financial distress engulfed much of the region. The IMF is criticized that it precipitated the crisis. This paper analysis the communication strategy and policy of the IMF demonstrated in Thailand. In particular, in a context of the IMF announcement’s impact on the foreign exchange market and behavior of speculators. With the extension of the experimental investigation and on the basis of overall analysis of theories and empirical evidence, this paper suggests that the IMF’s program announcement made at a mid of the crisis could contribute to the coordination of speculative attacks and thus, deepen instability